Finance 101: What Are Direct Lender Loans?
Last updated on October 14th, 2023 at 12:11 am
No matter how organized or good you are at budgeting, there comes a time in all our lives when an unexpected cost hits.
It could be something minor, like a repair to a car scratch. Or it could be something more significant, like medical expenses.
Most of us need a loan at some point. But traditional finance has moved on from the days of visiting your bank manager. There are now numerous lenders offering a variety of financial products and loans.
In this comprehensive guide, we’ll explain one type of product: direct lender loans. Read on to learn what this is and whether it could be the solution for you.
What Are Direct Lender Loans?
With so many financial products and providers on the market, many of us yearn for a more streamlined way of handling our money. That’s where direct lender loans come in, as they can offer a simplified way of borrowing.
Direct lender loans, in essence, cut out the middleman. These loans don’t involve brokers, banks, or other intermediaries.
It’s a one-to-one arrangement between two parties, and the borrower receives the money directly from the lender.
It’s straightforward, with fewer hoops to jump for a prospective borrower.
How Direct Lending Works
The beauty of direct lending is that it’s a simple process. On paper, it’s not too dissimilar to a traditional loan. A borrower will make an application to a lender. Once they do that, the lender then evaluates the application.
There is one core difference between direct lending and those with intermediaries. With traditional lending, it’s usually the latter that will handle that review process.
With direct lending, the lender will process all the financial and credit checks before approving the loan. Once they do that, they’ll add the funds to your account.
Here is what the process looks like, step by step:
Step 1: Borrower Application
The borrower decides they want to make a loan application. They’ll complete a form with the relevant information. That includes their personal and financial data, such as their income and employment.
The application form can be in person. Though, in this modern, digital era, it’s more likely to be an online application. If you are borrowing money, completing these as honestly and accurately as possible is always important.
Step 2: Submit and Review
After the borrower has applied for money, it’s in the hands of the lender. This period is the point when the lender reviews your application. They may do extra checks at this point, like a credit check.
It’s all part of their due diligence process to ensure they offer a loan to a reliable lender.
The timescales for this vary depending on the lender. Some will be instant, some will commit to fast reviews (in 24-48 hours), while others may take several days to a week.
Step 3: Approval
When the lender has reviewed the application, they will approve or reject it and send the borrower confirmation.
If they decline the application, they’ll notify the lender. However, lenders don’t usually provide comprehensive information about why they turned down a loan application.
Step 4: Loan Received
Once the lender has approved the loan, they will transfer the money into the borrower’s bank account. That typically happens as soon as the lender has approved the loan.
Step 5: Repayment Begins
When borrowers apply for a loan, they will agree to repayment terms. Often, they’ll have a choice of repayment options, allowing them to spread the loan over a more extended period if it’s a better option financially.
Once the money is in the borrower’s bank account, they will start the countdown to the first repayment.
Most loan repayments are monthly, though some short-term loans may be weekly.
Step 6: The Loan Term Ends
Once the borrower has repaid all the money over the loan term, the lending period is complete. The lender may send a letter to confirm. Payments will automatically stop once the repayment period has ended.
Types of Lender Loans
A Lender loan is a broad category. Within are different types of loans, and these are the types you are likely to see advertised. Each is one that a lender has tailored to a specific financial need.
Personal Loans
Personal loans are the most common type in this category of direct lender loans. These are loans that don’t require collateral from the borrower.
People often use personal loans for various reasons, like a car, medical bills, or renovations. They come with multiple repayment options and vary in size depending on the lender.
Payday Loans
As the title suggests, a payday loan is an immediate cash loan to support someone – typically until their next payday. It’s usually a small loan in the $50-$750 range.
They are brief cash loans with fast approvals and are accessible to many borrowers. They also have higher interest rates as they are only intended for short-term borrowing.
Bad Credit Loans
Your credit rating is a score of a borrower’s financial reliability. It tells lenders how well borrowers have managed past finances.
A low credit rating can stop you from getting a loan from a standard lender. That’s where bad credit loans come in. They are usually at a higher interest rate to counter the higher risks of that lender.
Lenders design these loan products for those who don’t have access to another source because of a poor credit history.
Installment Loans
An installment loan is a specific sum followed by fixed repayments. These are even payments over a duration that the borrower chooses.
It helps borrowers create a more flexible financial arrangement that keeps loan repayments manageable. These loans typically fall in the regions of $1000 to $10000, though some lenders may offer more or less than this.
Emergency Loans
An emergency loan is for borrowers with unexpected and urgent expenses, like a car repair. It’s designed as a loan with a fast approval process to help with a pressing need.
Since it offers that benefit, it also often comes with a higher interest rate. Like payday loans, these are usually small, ranging from $100 to $1000 in most cases.
Short-Term Loans
Short-term loans are there for people who don’t want a debt commitment for a long time. It could be to help with an immediate financial need but one that the borrower intends to repay quickly.
A short-term loan means you aren’t paying years of interest, so it’s less costly in the long term. However, interest rates are typically higher than for longer-term loans.
No Credit Check Loans
As the name suggests, a no-credit-check loan doesn’t go through the same approval process as many loans. That’s because the lender won’t run a credit check.
Instead, they will often examine employment and income records. It’s a valuable loan for those without a credit background or those with a poor credit history.
Since there is more risk for the lender, the interest rate reflects that and is steeper than you will find with a standard loan.
Benefits of Direct Lender Loans
Let’s examine some advantages for borrowers to help you understand whether direct loans are the best option. Here are the main benefits of lender loans and why they are becoming an increasingly popular option for borrowers.
They Are Fast
Lender loans eliminate intermediaries and have a quick and efficient decision-making process.
So, they are a more convenient application process than traditional lending models. That’s advantageous if you need money in your bank fast.
Fewer Hurdles
Intermediaries are another hoop to jump through when making a loan application.
They often come with fees and extra administrative work. A more streamlined direct lending model is beneficial from this perspective. It isn’t as complicated and could potentially mean lower fees.
Improved Communication Methods
A direct lending model means you only have to manage a two-way communication between the borrower and the lender. It’s less complicated and reduces the risk of miscommunication or delay.
It’s Flexible
Direct lenders create different types of loans to suit many circumstances. It’s a flexible model that helps those with unusual needs who may not have access to a traditional loan.
It meets the demands of a broader and more diverse market.
It’s Transparent
Since it’s a one-to-one relationship, direct lending comes with more transparency than you may get when dealing with a third party.
You’ll have a clear written outline of all the loan terms. Plus, since lending is a growing and competitive field, many top providers will make a concerted effort to offer clear and easy-to-understand terms.
Borrows Can Sometimes Create Personalized Loans
Some direct lenders will allow you to personalize your loan. For example, you may have the option to determine the number and frequency of installments.
That makes it easier to ensure your loan won’t overstretch your budget and you don’t risk defaulting on a future payment.
Better Data Protection
Since you aren’t sharing your financial details with a third party – only the lender – there is less risk of your data falling into the hands of the wrong person.
It’s enhanced privacy for your personal information, something that’s important in an era where cybersecurity is an ever-present problem.
Interest Rates and Fees of Direct Lender Loans
Before taking out a loan, you must understand interest rates and other fees. A grasp of this will help you see the complete picture of what a loan will cost you over the long term.
It will also help you compare different loans side by side. Let us start by examining the interest rate, which you’ll often see written as APR (Annual Percentage Rate).
The APR
The APR is the annual cost you’ll pay for that loan. It’s different from a simple interest rate. It covers the interest and extra fees for the loan. So, it’s the APR you need to examine when comparing the costs of different loans.
A higher APR is more expensive. However, you must keep in mind the duration of that loan. A loan stretched to 5 years means you are paying interest for those five years.
In contrast, a short-term loan (for example, three months) means you only pay interest for that period. From this perspective, when comparing APR, you must also consider the length of your loan.
Fees
Some loans may have additional charges that aren’t covered in that APR. The lender must explain any charges before you agree to a loan. The most common charge that you’ll see on direct lender loans is a late payment fee.
That is usually a fixed cost if you don’t pay an installment on time. Some loans may also have an insurance cost that the lender adds to the cost of the loan, so check for these.
It will help you avoid any unexpected financial expenses you may be unable to afford.
Direct Lending: Understanding the Impact of Your Credit Score
Credit scores play a central role in lending. This score is the lender’s primary tool to determine whether to approve a loan and what APR they should charge to reflect your risk as a borrower. Here is what you need to know.
Credit Scores, Checks, and Loans
A credit score is a numerical value that determines your financial background. Third-party credit agencies calculate this score and share it with financial providers.
If you have had loans in the past and always repaid them on time, you are likely to have a good score.
If you take out lots of loans and find you are sometimes late repaying them, your score will likely be lower.
Other factors can affect your credit score. That includes your income, bankruptcies, tax liens, and residential history.
Suppose you don’t have any financial history because you haven’t borrowed before. In that case, you are an unknown to lenders, meaning you may have no credit score.
When lenders check this score with a third party, their primary reason is to approve or decline your application. Sometimes, a lender may contact you and offer you a loan with a higher APR to reflect a poor credit history.
Low and No Credit Scores: Your Options
Suppose you lack a credit history or have a less-than-stellar record. In that case, you won’t have as many borrowing options as something with an excellent credit history.
However, you will have some options.
As we mentioned earlier, some direct lending providers tailor their products to those with no or low credit scores.
Some loans don’t run a credit check. These are helpful products to use to build your credit history if you don’t have one.
Another option to secure borrow is to offer a guarantor. This person underwrites your loan and agrees to take on the responsibility of repaying it if you can’t. It’s usually a friend or family member.
Exercising Caution When Searching for Lenders
Lending and financial institutions are competitive, varied, and growing in number. It means you need to exercise caution when searching for a provider. Going with a reputable company is vital.
Here are some warning signs and red flags to watch for when researching.
Unclear Fees
During the loan application process, check for details about any fees. Avoid fees that are unclear or seem hidden from view. A good lender will write this in plain English, and it will be easy to understand and easy to spot.
That is a transparent lender. Avoid those who keep their fees buried away in legal jargon in the small print. Likewise, avoid those who don’t supply details of their APR.
Pressured Sales Tactics
If you feel pressured to take out a loan or you get repeated sales phone calls, this is a red flag.
A reputable lender will have a modern website and an easy online application process. They won’t use pressured sales tactics to encourage you to sign up for a loan.
Unclear Terms
It’s not only the fees to check when completing your application. Make sure the terms are easy to understand, too.
The application process should tell you the number of installments and the amount you must pay. If you are unclear, always ask before submitting your application.
Protecting Yourself From Bad Lending Practices
You can take some simple steps to protect yourself from bad lending practices. First, always do your research. That means checking the provider, including any online reviews from customers.
Check for accreditations, like membership to a local Chamber of Commerce.
Second, always understand that you have rights as a customer to fair and transparent lending processes. Check what legal rules exist for your state.
Last, always be vigilant. Read through the details and terms before clicking the submit button.
Repaying a Direct Lender Loan: Some Tips
Repaying a loan on time is vital. It helps protect your credit rating and means you’ll avoid costly fees for late payments. Here are some tips to help you:
Understand the Terms
Repaying a loan can only happen if you understand what to pay and when. Before you complete your loan application, look at the figures.
If you are unsure what your monthly or weekly payment will be for the loan, check this before applying.
Keep a Calendar
Once you have a loan, add the dates into your calendar for when the payment will start and end. This approach will avoid nasty surprises like getting charged for missing a payment because you thought you’d reached the end date.
Set Up Automated Payments
Don’t rely on memory to make your monthly payments for a loan. Always set up automated payments from your bank account on the same day each month.
Create a Budget
Ensure you can afford the loan before you apply.
Loans always seem attractive because a lump sum can sometimes seem transformational. However, consider your income and expenses and make sure you can cover the repayments.
Consider pausing other luxury expenses until your loan term ends if your budget seems tight.
What to Do if You Miss a Payment
The most important tip to remember is to address a missed payment immediately. Never ignore the problem, as that can often make matters worse and more expensive.
Your first step is to contact your lender. Explain what happened. If you can’t pay immediately, ask to come to an arrangement instead. You should also use this time to check your contract, as you may incur late payment fees.
It is often worth trying to scrape together the money to pay what you owe rather than incurring the charge.
So you might need to revisit your budget and look at other expenses you can put on hold for the time being until you are up to date with your payments again.
If you find that you struggle with managing your repayments more than once during the terms of the contract, seek financial counseling. They may be able to give you practical advice to deal with your debt.
How to Choose a Lender
When choosing a lender, you should focus on more than the APR. While costs are necessary, getting a good financial fit for you is vital.
First, consider the type of loan you need. Do you have a short-term or emergency need for cash? Or are you seeking money for a long-term project like a home extension?
Secondly, check the reputation of providers when shopping for deals. It’s essential to go with a lender with an excellent track record.
You should also see how they perform with customer service and if their support team is easily contactable.
Your next step is to compare the APR for a competitive deal. However, remember to consider the loan duration and any extra fees.
Finally, compare the approval process. Suppose you need a loan by a specific deadline. In that case, you want a lender with a fast turnaround between application and depositing the money in your bank account.
Direct Lender Loans: A Solution for All
Lending is no longer for the few. With more options and providers on the market nowadays, there is a financial product for everyone. If you need a loan, consider how you might benefit from direct lender loans.
You can begin the application process now at Ready Payday Loans. Our fast review process and competitive rates could be ideal for your needs.
